Red, red, in every direction we turn today… red.
The Dow Jones shed 800 scarlet points on the day.
Percentage wise, both S&P and Nasdaq took similar whalings.
The S&P lost 86 points. And the Nasdaq… 242.
And so the market paid back all of yesterday’s trade-induced gains — with heaps of interest.
Worrying economic data drifting out of China and Germany were partly accountable.
Chinese industrial production growth has slackened to 4.8% year over year — its lowest rate since 2002.
And given China’s nearly infinite data-torturing capacities, we are confident the authentic number is lower yet.
Meantime, the economic engine of Europe has slipped into reverse. The latest German data revealed second-quarter GDP contracted 0.1%.
Combine the German and Chinese tales… and you partially explain today’s frights.
But today’s primary bugaboo is not China or Germany — or China and Germany.
Today’s primary bugaboo is rather our old friend the yield curve…
A telltale portion of the yield curve inverted this morning (details below).
An inverted yield curve is a nearly perfect fortune teller of recession.
An inverted yield curve has preceded recession on seven out of seven occasions 50 years running.
Only once did it yell wolf — in the mid-1960s.
An inverted yield curve has also foretold every major stock market calamity of the past 40 years.
Why is the inverted yield curve such a menace?
As we have reckoned prior:
The yield curve is simply the difference between short- and long-term interest rates.
Long-term rates normally run higher than short-term rates. It reflects the structure of time in a healthy market…
Longer-term bond yields should rise in anticipation of higher growth… higher inflation… higher animal spirits.
Inflation eats away at money tied up in bonds… as a moth eats away at a cardigan.
Bond investors therefore demand greater compensation to hold a [longer-term] Treasury over a [short-term] Treasury.
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